Rubber Glove Manufacturers, a defensive sector

One of more defensive sector to invest in is the downstream resource-based industrial sector. Our main resource-based industries are oil & gas, CPO, timber and rubber. It is hard to see how we can invest in the downstream sector of the oil & gas industry in Malaysia, as this sector is dominated by foreign giants. The downstream sector of the CPO industry is mainly attached to the main upstream players, such as IOI, Sime & KLK. Timber downstream sector is cyclical & currently this sector is experiencing lower prices & demand due to the global downturn. The rubber industry is the rare one where the downstream sector is standing on their own and the demand is still relatively stable. These include tyre-making, rubber glove etc.

Rubber glove manufacturing is the best sub-sector to invest in, because of the level of technology acquired by local players, steady supply of raw material (rubber latex) and stable demand for rubber gloves. Because of these advantages, some of the local players have become the top producers of rubber glove. Topglove, Malaysia's top producer of rubber glove, is the largest producer of rubber glove worldwide.

In this post, I shall examine only the top 2 players, i.e. Topglove & Kossan. From the Table 1 below, we can see that Topglove is nearly twice the size of Kossan, in term of turnover & net profit. However, Kossan's EPS of 41 sen is slightly higher than Topglove's EPS of 37 sen.

In term of valuation, Kossan appears to be a cheaper stock than Topglove. Topglove share is trading at a PE of 10.3 times as compared to Kossan's PE of 5.4 times. In addition, Kossan's dividend yield is slightly higher than Topglove at 3.7% vs. 2.9%.


Table 1: Topglove & Kossan's Key Financial Statistics

KOSSAN

In the past 4 quarters ending 30/6/2008, Kossan's turnover grew by 21% from RM657 million to RM792 million, while its net profit grew by 31% from RM50 million to RM65 million.


Table 2: Kossan's last 8 quarter;y results

Kossan did a double-top at RM5.90 in April & July 2007. Since then, the share price has been sliding & it broke the long-term uptrend line support at RM2.80 level in June this year. The strong horizontal support to look out for is at RM2.00 & thereafter RM1.50.


Chart 1: Kossan's monthly chart as at October 31, 2008 (source: Quickcharts)

TOPGLOVE

In the past 4 quarters ending 30/6/2008, Topglove's turnover grew by 12% from RM1.23 billion to RM1.37 billion, while its net profit grew by 7% from RM103 million to RM110 million.


Table 3: Topglove's last 8 quarter;y results

Topglove made a high of RM10.00 in December 2006 & the share price has been sliding ever since. The stock appears to be in an advanced stage of bottoming phase since the beginning of this year. Even the monthly MACD is beginning to hook up, but we have yet to see a positive crossover. In term of technical reading, Topglove looks more attractive than Kossan.


Chart 2: Topglove's monthly chart as at October 31, 2008 (source: Quickcharts)

In conclusion, Kossan is a cheaper stock than Topglove. Topglove is however more interesting from the technical perspective. On balance, I would prefer Kossan over Topglove.